Toronto house prices climb; Vancouver sales on way back up

TORONTO -- The average sale prices of Toronto homes continued to climb in June, but rising mortgage rates and an oversupply of condos could spell trouble for the city's real estate market, economists said.

Housing sales in the Greater Toronto Area were down by less than one per cent in June compared with the same month a year ago, a report by Toronto Real Estate Board said.

But the average selling price was up by 4.7 per cent to $531,374, driven by single-detached and semi-detached houses, particularly in Toronto.

Meanwhile, home sales in Vancouver were up 11.9 per cent in June compared with a year ago, but down from the previous month.

On Wednesday, the Real Estate Board of Greater Vancouver said there were 2,642 homes sold through its Multiple Listing Service in June, up from 2,362 sales in June 2012, but down from the 2,882 sales in May 2013.

Robert Hogue, a senior economist at Royal Bank (TSX:RY), said the numbers indicate Vancouver's real estate market is on the rebound after hitting its lowest points last year.

But economists say Toronto's market still faces some potential risks.

Adrienne Warren, an economist at the Bank of Nova Scotia (TSX:BNS), said rising mortgage rates could make single detached homes in markets such as Toronto and Vancouver too pricey for first-time buyers.

Rates have been at all-time lows since the economic downturn, but have slowly begun rising in the past two months.

"At the same time because supply is tight and unlikely to increase significantly, I think that will probably put a floor underneath how low the prices could move," said Warren.

It will all depend on how quickly and dramatically bond yields rise, said Hogue. "If (the current) rate of increase is sustained for another month or two, that could put a bit more stress on the housing market. If those bond yields stabilize and interest rates don't necessarily surge, then the market may take it in stride."

Canadian homebuyers may be caught off guard when mortgage rates go up. A recent Bank of Montreal survey found one-third of first-time homebuyers expect interest rates to stay the same during the next five years.

However, Warren said a bigger challenge for Toronto's real estate market will be to absorb all of the new condominiums that will be coming onto the market in 2014 and 2015.

"There's definitely a risk that condo prices, which have essentially levelled off, could be under downward pressure," said Warren.

David Madani, an economist at Capital Economics, said fluctuations in the condo market could affect the rest of the real estate sector.

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